Get the tools you need to analyze, evaluate and recommend specific actions organizations can take to grow their value and avoid common growth pitfalls. Learn to determine how best to build value, whether by scaling existing markets, entering established markets or creating new markets through innovation and acquisitions.

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This is a solid strategy course where you'll learn about grown through scaling, new market entry, acquisition, innovation and performance excellence.

From the lesson

Growth through Acquisition

Mergers and acquisitions (M&A) are common--but rarely successful--ways firms attempt to grow their business. In this module, we'll show you the pros and cons of M&A, suggest valid alternatives, and outline effective M&A strategies. Using the Acquisitions Analysis tool, you'll be able to assess the impact of a potential M&A and avoid common pitfalls of this type of growth.

Taught By

Michael Lenox

Jared Harris

Transcript

Today, we're going to be talking about growth through acquisition, and let me start with the example of Pepsi Co. Pepsi Co is a manufacturer of soft drink beverages, and also chips and snacks through its Frito Lay division. Several years ago they went through a pretty substantial strategic restructuring. They spun off several lines of business in order to free up resources to make several strategic acquisitions. They bought Gatorade, they bought Quaker, they bought Tropicana orange juice, and over the past several years it's been apparent that those acquisitions have been very profitable and they've been very successful acquisitions for Pepsi Co. Why? What makes an acquisition successful or not? Well in Pepsi's case, they recognized certain market opportunities in their product line, gaps if you will, that were there. They sensed an increasing desire on the part of consumers for, say, healthier snacks and beverages, or beverages that might be more appropriate for certain times of the day. So, they saw an opportunity to, instead of creating new brands and new products in house, to just purchase those existing companies that had those brands. Quaker, Tropp, Gatorade. So Pepsi went through that acquisition process, brought all of those businesses into the fold of Pepsi Co, and that's been a set of acquisitions that's played out very positively for Pepsi Co. So we wanna explore what sort of principles can we learn from an example like that. You can see that acquisitions, mergers, have been a big part of the global economy for a long time. You can see from a chart like this that they've really over time, increased all around the world. This is a chart that comes from the Economist, I think the original source of the data is deal logic. But it shows us just the sheer magnitude of merger and acquisition activity around the globe, and a lot of these mergers and acquisitions involved companies you've heard of. So here is a list of just some recent acquisitions that may have been something you've read about in the news. So in 2014 AT&T bought DirectTV, a little bit more of a complementarity based merger. In 2013, American Airlines bought US Airways, two US based airlines but this together formed the largest airline in the world. You can just see that the amounts of these deals is is just huge. Disney in 2012 bought Lucas Film. This was the company that owns the properties to Star Wars, and so there's movies in the works and this is a huge opportunity for Disney. But you can see that the sticker price on all of these acquisitions is quite substantial, so before we go further let's just get straight some terminology. Since we're gonna be talking about mergers and acquisitions and those sorts of things, what do these terms mean? So first of all, what is a merger? A merger is a transaction where two firms agree to integrate their operations on a relatively equal basis, as opposed to an acquisition. An acquisition is a transaction where one firm buys another firm and then makes the acquired firm a subsidiary or subsumes that firm within its own portfolio of businesses. Now of course, the running joke is, but there's really no such thing as a merger, it's always an acquisition, right? So if you're at an organization that's going through a merger and you don't know whether you're the acquirer or the acquiree, chances are you're probably the acquiree. But a merger or an acquisition is the coming together of two firms. Now this can play out in a number of different ways, it could be a friendly take over. This is a transaction where the target firm solicits an offer from the acquirer, or maybe multiple potential acquirers, as opposed to a hostile takeover. So this is a transaction where a target firm is targeted for takeover and they haven't necessarily solicited any sort of a buyout offer, but another firm comes in and gives them an offer and in some cases it might be something that they're not necessarily looking for, hence the word hostile. So what are some features of growing through acquisition? Well first of all, mergers and acquisitions constitute really the most common method of implementing a growth strategy or diversification strategy. To go back to that chart I showed a few minutes ago, it's just a huge a number of attempted mergers and acquisitions all across the world. It's a very common way an organization might attempt to grow. A merger and acquisition can aid some sort of a consolidation strategy. Sometimes we see this play out in an industry where there's an attempt to kind of roll up the industry. You remember from thinking about industry dynamics, that the fewer competitors there are in an industry space, that the lower the rivalry is in that industry space. So sometimes an acquisition or a merger might be driven by the attempt to consolidate or roll up the industry and eliminate some of the competition. An acquisition or a merger involves significant and unique capital budgeting decisions. I mean, there's no dry run here. You've gotta pay all the money up front, so it's a big decision that usually commands a large amount of resources. You saw that in the dollar amounts that I showed you a few moments ago. There are substantial exit costs, both in terms of dollars or whatever your currency happens to be, or in terms of reputation. In other words, it looks bad to have a merger that didn't go well, that you have to sort of unwind down the road at a loss. The investors in that firm take a big hit when that sort of thing happens. So it's very costly not only to enter a merger or to make an acquisition, it's inherently costly to get out of that sort of a deal once it's begun. So, that's an important factor to consider. The other thing to think about is that managing the integration of these two companies is an extraordinarily complex process. In fact, it's as complicated as starting a new business, and oftentimes, that's underestimated. There's a complexity to integrating these two organizations after the merger or acquisition takes place. So growing through acquisition represents a great opportunity, but there's also a number of features that make it a very unique type of strategy for growth, and therefore something that should be carefully thought through.

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